Insights: Margin Spiral

Apr 17, 2020

The collapse of a “relative-value” hedge fund strategy likely resulted in a spiraling of market dislocations, margin calls, and forced liquidations of leveraged hedge funds during the Wuhan coronavirus period.

For years, highly leveraged “relative value” hedge funds had been taking advantage of a thin spread between US Treasury securities and the futures derivative on those bills, notes and bonds. They purchased massive amounts of Treasury debt and sold the corresponding futures contracts. Theoretically, their leverage could approach 100-to-1.